Terms of trade set out the terms that apply between parties for the buying and selling of goods and/or services. A terms of trade will form the contractual relationship between buyer and seller. Therefore, having clear written terms of trade benefits both parties. But what should be in a terms of trade? Below we identify some key considerations primarily from the seller’s perspective but a buyer will be keenly interested in these considerations too from their own perspective.
Price – How is price calculated and when is it payable? Is there a quote process, price list or some other mechanism for determining price? Whatever the circumstances you will want to ensure these terms are clear and concise to avoid future dispute.
Payment – If the buyer does not pay, the seller will want clear rights of recovery. For example, sellers will want the ability to charge interest on any amount owing. A buyer will want to make sure this interest rate is fair and not punitive. A seller will also want a clear contractual right to recover all costs including legal costs in the event of non-payment.
Security – Where physical goods are being sold on credit, the seller should consider taking security against the goods supplied. This involves registration under the Personal Property Securities Act. This will give the seller a better right to recover the goods where the buyer does not pay. In certain situations this right may be more practical then suing the buyer for non-payment. It also may give the seller greater rights where the buyer is in some form of insolvency process. A buyer will want to ensure that security is only granted where appropriate as it could affect future finance or the sale of their business.
Liability – Terms of trade provide an opportunity to potentially limit a seller’s risk and liability with their customers. For example, is the seller limiting their liability for any indirect loss the buyer may incur. When does risk in the goods pass to the buyer and who has responsibility for insurance until delivery? Do you need to be specific about what warranties apply? For business-to-business transactions sellers can potentially contract out of the Consumer Guarantees Act and Fair Trading Act in certain circumstances and should generally do so where lawful.
Guarantees – When dealing with corporate entities it may be appropriate to have key persons guarantee the amount owing for the buyer. This will require the guarantor to sign a guarantee. Any guarantee provisions should generally be incorporated into the terms of trade. From a buyer’s perspective perhaps, the guarantee should be negotiated or avoided. Often terms of trade will try to make a buyer personally liable without an express guarantee. Such wording should be resisted where feasible from the buyer. Often these terms are not brought to the buyer’s attention.
Even if you have a comprehensive terms of trade it is recommended that you review this every few years to ensure it complies with recent legislative changes. Some recent examples requiring potential updates include changes to the Fair Trading Act and the Privacy Act.
While terms of trade are used often their actual contents are rarely revisited. Where you do not have terms of trade you should consider getting appropriate terms of trade and where you already have them you should review it for changes in industry, your own business practice and legislation.